Wednesday, August 26, 2009

The Doug Kass "top" and bottom call

It really gets wearing calling these Wall Street folks to task, who keep finding cracks in the market, so I decided to read I Corinthians 13, before I wrote this story. Two weeks ago, Doug Kass made another bearish call. Today he amplified it, and said that the market may have made a top for the year, and he gave the following ten reasons:

  1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.
  2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.
  3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.
  4. The credit aftershock will continue to haunt the economy.
  5. The effect of the Fed's monetarist experiment and its impact on investing and spending still remain uncertain.
  6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.
  7. Commercial real estate has only begun to enter a cyclical downturn.
  8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.
  9. Municipalities have historically provided economic stability -- no more.
  10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high-tax health and energy bills also loom.

But remember how Wall Street works. These macro calls are like the game "Who wants to be a millionaire." You get a Phone-a-Friend, an Ask-the-Audience, a Fifty-Fifty (50:50) and then three bad calls of your own.

A week before the market bottomed, Doug Kass got bullish, calling for a generational low. In mid April though, he sold out. And he got short.

On April 17, he was adding to his shorts and his SKF long and said this "Unlike my some of my bullish brethren on RealMoolah, I see blemishes in both Citigroup and General Electric's reports" and he said this "I added to my SPDRs and PowerShares QQQ shorts and my UltraShort Financials ProShares long in premarket trading."

Because the day before Kass said this:

Doug Kass
Buckle Up, Goose -- We're Going Short
4/16/2009 4:39 PM EDT
In light of the fact that the S&P 500 has met my variant view expressed five weeks ago, Maverick is now engaging on the short side. I would caution getting too carried away with the market's strength -- which appears now to be the case.

I would say that Doug Kass has been way better than most on this rally, but he has used the "Who wants to be a millionaire" approach to market timing.

But since their were so few bulls at the bottom, and since Cramer needs Kass to sell subscriptions, his record is overstated.

So think about that, and his variant view of the market call today.

It ain't as cracked up as it looks!


Anonymous said...

I think people are underestimating the power of loose monetary policy.

Palmoni said...


CK said...

I think "persistence bias" every time i read these guys that have enjoyed the spotlight over the last 12 months.

They keep referring to the return since the market low, but was March 9 the most real and valid price? Was Jan 1 the most valid price for reference, or maybe Sept 1 2008 was the most valid price. Then we would be down in our analysis period.

Price is a function of liquidity and now the liquidity coming back to the equity market is huge.

I went back and read Denninger's March 9th entry, and that had to be the point of maximum panic and tight liquidity.

20% of the S&P will default over the next 12 months...ripe!!

Palmoni said...

That's a great post. Extreme prices aren't supposed to be used as a reference point, because those prices weren't "real"